The Fed’s move last month may be small but it is a sign of an improving economy and it is a signal of what is to come. The past 8 years of a near-zero Fed Funds Rate has served the U.S. economy well. It has pulled us out of the mortgage crises and ensuing Great Recession. Unemployment has dropped from 10 percent to below 5 percent; inflation is actually lower than the Fed’s target of 2 percent and home values have recovered to pre-2007 levels here in Santa Cruz County.
From a mortgage standpoint, the small Fed rate increase of just 0.25 percent has had no immediate impact on the 15 and 30 year fixed rates. Of greater concern to homebuyers is the fact that home prices in Santa Cruz County have been on the rise for several years now. At a conservative 5 percent annual rate of appreciation, a home that may be purchased today for, say, $700,000 would be worth $735,000 one year from now.
Too often we hear that prospective homebuyers are waiting to save up more money for the down payment before buying a home; however, even at a 3 percent appreciation rate, most cannot save enough to even keep up with home price appreciation, let alone save enough to make a significant difference by increasing the down payment. By the same token, waiting for more homes to come on the market is likely to be counter-productive as well because prospective sellers who are holding back now are probably doing so in order to get a higher price for their home down the road.
Increasing home values combined with a likely increase in mortgage rates in 2017 present challenges for first time homebuyers. The popular 30 year fixed mortgage rates have remained at or below 4 percent for years now but rates have come up since the presidential election and economists are predicting that the 30 year fixed rate could rise to 5 percent by the end of 2017. With the Fed move, Prime Rate moved up in March from 3.50 percent to 3.75 percent and could move up to 4.50 percent by the end of this year. HELOCs and ARM loans will experience an increase in rates and payments also.
While there are always challenges for first time homebuyers on the horizon, the good news is that the mortgage industry has been loosening the reins on qualifying guidelines over the past several years. As I have stated in this column many times, obtaining a mortgage today is easier than it was when I began my mortgage career here in 1986. Down payment requirements have decreased and debt-to-income ratios have been allowed to increase. The big difference today is that borrowers have to deal with all of the paperwork required to meet the compliance guidelines that have been mandated by the Consumer Finance Protection Bureau. If you are considering buying a home in the next 12 months, it is not too early to meet with a mortgage professional to find out what your options are.